Despite enjoying strong economic fundamentals suffering from bearish sentiments

SHABBIR H. KAZMI, Special Correspondent
Sep 03 - 09, 2007

Soon after touching record high the KSE-100 index came under pressure for a number of reasons. The rumor mongers succeeded in ushering in negative sentiments through disinformation. The rumors included possible attack of the US forces in the border areas adjoining Afghanistan, dismissal of Prime Minister, Shaukat Aziz's government and dissolution of assemblies, imposition of emergency and ongoing conflict with the judiciary.

As the index eroded also came the news of financial market crises (sub prime loans) in the US, negatively affecting global capital markets. This coincided with the outflows from Special Convertible Rupee Accounts (SCRAs). It was propagated that foreign fund managers were liquidating their investment due to growing political uncertainty in the country.

According to some of the analysts sub prime loans issue of the US has relevance with the leading global capital markets but was of no consequence for Pakistan. Any reduction in the disposable income of the US citizens or foreclosures of the real estates just could not affect equities market in Pakistan. However, exports of textiles and clothing may come under pressure because Pakistan exports low quality and low price products to the US market.

They also say, "Even if one accepts this rationalization, for the sake of argument, the probability of foreign fund managers selling their stake in Pakistan is low. Firstly because the exposure in Pakistan is very negligible percentage of their cumulative investment in the overseas markets and secondly the investment is in blue of the blue chips which continue to enjoy strong economic fundamentals and earning potential."

According to a report by KASB Securities, "While the market is likely to remain volatile till the complete resolution of political issues, we continue to believe in Pakistan's structural story. Political changes are not likely to derail economic progress. Key sectors are either deregulated or straightforward in terms of desired direction. No politician opposes reforms and while delays are possible, we see no reason for change in direction."

The government is likely to allow the next regime to spearhead the privatization of major public sector entities and would only proceed with Global Depository Receipts (GDRs) and Initial Public Offerings (IPOs) already planned by the present administration.

The bull run of the equities market has been driven by the on going privatization process. The strategy of 'Privatization for People' has provided impetus but deferring of the plan could interrupt the process temporarily.

This is not surprising especially given the recent cabinet shuffle, in which the Privatization Minister has been changed. The privatization process has already seen a delay, with the annulment of Pakistan Steel Mills deal by the Supreme Court, and the deadlock in the privatization process of Pakistan State Oil as the Attock Group has challenged its disqualification from the list of bidders.

Analysts are also of the opinion that both the issues i.e. the turmoil in the US market financial market and political uncertainty due to potential deal with the self-exiled leaders are being over played. The issue of sub prime loans has no relevance with Pakistan. Any attempt to link current bearish sentiments prevailing in the US market tantamount to diverting attention towards a non issue.

It may also be said that some of the analysts are exaggerating the issue. A review of market behavior of last couple of months may help in understanding the prevailing situation. One point is clear that whenever there was selling pressure and prices went down certain level it also instigates buying.

The strength of Pakistan's equities market and role of local investors can be gauged from the fact that both the KSE-100 and KSE-30 indices (WoW) improved by around 1% and 3%, respectively. The week ending 31st August closed with the market capitalization of around US$ 58 billion, which was slightly higher by around 1% from the closing on last Friday.

On a weekly basis, KSE-100 index increased by about 161 points, while the KSE-30 index rose by 478 points. The average daily trading volumes showed a decline of around 5% during the week. The investments outflow in SCRA (Special Convertible Rupee Accounts) posted year to date figure of around US$ 191 million on 30th August.

CFS investment continued the downward trend and settled at a 7-month low of about Rs 42 billion on Friday, 8.4% lower than Rs 45.86 billion recorded a week earlier. The decline in investment observed due to negative sentiment followed by lower interest of the market participants on the back of prevailing political uncertainty. CFS rate settled at a two-year low of 10.60% compared to 10.76% last Friday. PPL, OGDC, NBP, POL and PSO contributed 46% to the total CFS investment.

Open interest on September futures counter was recorded at slightly more than Rs 6 billion compared to more than Rs 8 billion last week. Spreads remained positive throughout the week, however, settled at negative 1.40% against negative 3.01% last Friday. The dip may be attributed mainly to the effect of the roll-over week. However, future volumes rose by 15% to reach 67.4 million shares against 58.5 million shares last week.

Analysts having optimistic point of view fear that some of the forthcoming GDR issues and sale of Pakistan Investment Bonds may not succeed in attracting response achieved in the past. They also suggest that the government should defer the flotation for the time being and spend more time on market making.

The flow of funds is often disrupted due to disinformation spread by people having vested interest, often conflicting with the national objectives. Therefore, in the prevailing scenario it is the responsibility of the government to counter such negative propaganda.